Markets within markets

What a difference a couple of weeks makes!

Only three weeks ago people were still writing us off – a poor start to the year and the negative Nancys came out of the woodwork. It’s not our great football team I am talking about, however the comparisons are obvious.

Three weeks ago, the Geelong Cats were 0-3. And in the property industry we have experienced three very slow months, with 10 consecutive interest rate rises and very low consumer confidence.

Perhaps Philip Lowe spent some time with our man Scotty, but the decision to hold the rates last month has provided some much-needed confidence to buyers across the entire country.

Just like playing yourself into form with West Coast and Hawthorn (witches’ hats), there is nothing better to get up your match fitness! Several auctions this weekend saw prices exceeding the quoted range, confidence is coming back and our auctioneers are playing themselves into form!

However, there are markets within markets and as we come out of this correction phase and move into a normalised marketplace, we expect to see much more divergence. For example, 109 Albert Street, Geelong West – a very nice, renovated home within walking distance to Pakington Street – was purchased only a year ago for $1.72 million, and resold early this month for $1.7 million. That’s only a difference of $20,000 with 10 rates rises meaning the cost of borrowing is double what it was back then. A reasonable result, but also an indicator that the market is adjusting to the new norm of lending and in some segments prices have held.

As we get back to normal, we expect to see a flight to quality, and right now there is very low stock levels of quality homes in good locations, for sale in the established areas, so when this stock does come on, expect the competition to be match fit.

An example of flight to quality is the results that were achieved within the Stella Maris development in Drumcondra. This development, undertaken by the Monno group, provided high quality townhouses and apartments for off-the-plan purchases. The results have been amazing with some exceeding $3 million.

The Geelong unit market is still in its infancy. Across the board units and apartments only experienced increases of around 9 per cent during the COVID price jump, whereas housing averaged around 24 per cent.

The unit market in Geelong in my opinion has all the hallmarks of a market about to experience growth. The certainty of development provided by the Central Geelong Framework Plan, continuing housing affordability constraints, reduced borrowing capacity, the Commonwealth Games, and a range of new stock coming to the market in the next 18 months should allow this market to mature and competition is likely to increase.

The housing estates and new homes market is another sector that will continue to diverge from the established market. The downfall of domestic volume builders is worrying.

But here is the crux of the problem: in Victoria to be eligible for a building grant the home must be less than $750,000. The average block prices are circa $420,000 in the Geelong estates, so that’s leaving only $330,000 to build a home to a turnkey level of finish.

Once you take out the cost of labor and materials, which on average are about $1,500 per sqm, there is very little left for the builders’ margin. So it is no surprise that costs escalations have put some volume builders to the wall.

There is a fundamental problem with the economic model for volume building, especially when we impose fixed price contracts. A review is desperately need, but I would start by looking at the 47 per cent tax paid on every block that is driving up the land prices.

The confidence to build has never been so low, and sale volumes of land in the new estates has also begun to slow. This market is very much a watch and see exercise for a few months yet.

// Sponsored Content